The offshore wind sector continues to grow at an unprecedented rate, particularly in Europe, and increasingly in Asia and North America. The construction phase of any project is vulnerable to delay. That is particularly the case when construction is taking place in a challenging offshore environment. How, in legal terms, are delays addressed? Who takes the risk of delay?
The Risk of Delay in Offshore Wind Farm Construction
There are many factors that, individually or in combination, may cause delay to the construction phase of an offshore wind project. Some of the major factors are the following:
- Interface coordination: the standard procurement route for offshore wind projects, following the approach adopted for offshore oil and gas projects, further developed in Europe and since deployed in other markets, is a multi-package or multi-contract approach with increasing numbers of packages or contracts being let within each project. This provides for various and separate contracts to be entered into by the employer/developer entity allowing specialist turbine manufacturers, cable suppliers, foundation fabricators and transportation and installation contractors each to focus on delivery in their specialist area. This approach drives competitive pricing including by way of eliminating an ‘EPCI wrap’ risk premium but does give rise to a number of design, construction and programming interfaces that inevitably generate coordination issues, such as the risk of knock-on delays to other packages.
Contractual approaches to mitigating the risk of interface coordination delays include obligations for all contractors to participate in the preparation of a detailed interface matrix and to attend regular interface meetings as well as early warning notice and risk register obligations. Practical or commercial mitigants include perhaps most importantly the establishment of an experienced project development and management team and close project management by sponsors experienced in the offshore (wind) sector such as the major sponsors active in the UK and European market.
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Seabed conditions: accurately predicting the seabed conditions into which the turbine tower foundations will be driven or export cables buried, is notoriously difficult. Seabed surveys are costly and time consuming and may only provide a rough indication of actual conditions. Few contractors are able to accept the legal risk of encountering unexpectedly poor conditions, and for this reason contracts commonly confer upon contractors an entitlement to an extension of time and compensation for additional costs arising from unexpected seabed conditions. To reduce the scope for disagreement over what seabed conditions could have been expected, contracts may include a baseline of anticipated conditions, based on surveys and any other relevant information available at the time of entering into the contract.
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Weather and sea conditions: rough seas and high winds frequently cause delay and/or disruption during transportation and installation. The anticipated downtime from inclement weather can be modelled and predicted to an extent. This enables risks, within a predicted range, to be allocated typically in one of two ways. The first is to place risk of those matters entirely on the relevant contractor(s) and for the contractor(s) to price accordingly. The second is for the contractor(s) to bear the risk up to an agreed threshold defined either by reference to an expression such as “adverse” or “exceptionally adverse” weather, or to seasonal wave height and wind speed models derived from meteorological records.
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Design defects: delays may arise both during and after the construction phase from defects in the design of the structures, including their foundations. Under some contracts, the contractor may take the risk of problems with the design used for the project, even if the design was prepared or specified by or on behalf of the employer. However, if this is the agreed allocation of risk, it needs to be made clear in the contract, e.g. by including an overriding “warranty of performance” from the contractor.1 But there is no established industry practice as to risk allocation for errors in an employer’s design or specification, and outside of EPC contracting arrangements the appetite of contractors to accept such design risk may be small or non-existent.
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The knock-on consequences of delay: As with any construction project, a delay to one phase or package of works may impact subsequent phases or packages. However, two factors unique to the offshore construction environment may magnify the consequences of even a relatively minor delay on an offshore wind project. First, installation is likely to depend on a range of vessels many of which will be on time charter. If a delay pushes an activity beyond the extendable date of the charter party this may cause further delay waiting for future availability of vessels – over recent years there has been a shortage of such vessels in the market, so much so that a number of employer/developers have commissioned their own vessels to be used for major maintenance during the operational phase as well as construction. The same principle applies to weather windows. Even a relatively minor delay may push installation work into a period of greater downtime, or one during which no work can be carried out at all.
Contractual Mechanisms for Dealing with Delay
(i) Extensions of time
Extension of time (EOT) clauses offer contractors more time to perform the works and protection against liability for delay liquidated damages, during periods of delay which are not at the contractor’s risk. Depending upon the agreed risk allocation, the contractor may also be entitled to prolongation costs.
Even where contractual risk allocations are clear, disputes can arise over the cause(s) of delay. This is particularly the case where a project is being executed on a multi-contract strategy where contractors may be able to point the finger of blame at each other, as well as at the employer/developer. Contractors who claim EOTs are required to put forward evidence that the event (or events) they rely upon caused the period of delay in question. There may be a number of elements to proving delay, including showing the impact of the event on the contractor’s critical path of the works, evidencing the steps taken in mitigation of delay, and the elimination of other causes of delay for which the contractor may take the legal risk.
On this last point, concurrent or parallel delays for which the contractor is responsible may reduce (or even eliminate) a contractor’s EOT entitlement, especially if there is a clear proviso in the EOT clause which disentitles the contractor from an EOT to the extent of any concurrent delay. The inclusion, or otherwise, of a so-called ‘concurrency clause’ will be a matter of commercial negotiation. Where included in a contract, provisions of this nature have been upheld by the English courts.2
(ii) Liquidated Damages
The consequence of a contractor being in culpable delay is usually that it becomes required to pay liquidated damages for delay, at a rate specified in the contract. Where wind farm projects are concerned, it is usually possible, before entering into a construction or supply contract, to model likely losses should there be delay in the turbines being able to produce power. Setting the rates for delay liquidated damages is more complicated where a project is being procured via a multi-package strategy. A delay caused by any single package contractor could delay the entire project. It is unlikely to be commercially viable for an individual package contractor to compensate the employer/developer for such delay to the project as a whole but the rate of liquidated damages still needs to provide such contractor with a strong commercial incentive to avoid or minimise delay.
So long as a liquidated damages provision may be seen as protecting the employer’s legitimate commercial interests, without imposing an exorbitant or manifestly excessive penalty on a contractor, the provision will be upheld under English law. The risk of a liquidated damages clause being unenforceable, or “struck down as a penalty”, is heightened where the amount payable is not linked to the extent of the default and the loss. For example, if a contract provides that liquidated damages of £100,000 per day are payable whether one turbine is brought into operation late, or whether all the turbines are brought into operation late, the provision may be open to attack due to its non-discriminatory application.3
The Future: Floating Offshore Wind
The offshore wind sector has been characterised by a tremendous pace of technological advance, including a relentless increase in turbine size, matched by advances in tower height and blade length. The next frontier is floating offshore turbines designed to be placed in deep water, where they are not fixed into the seabed. There are numerous advantages to floating offshore power being developed, including time and cost savings associated with avoiding the need to construct foundations, reduced environmental impacts and the ability to locate wind farms in previously inaccessible, high wind-speed locations.
This next-generation of turbines has the potential to reduce significantly the time and cost of construction. The absence of foundations reduces the risk of poor seabed conditions delaying completion. Although that risk will be replaced by those accompanying the need for mooring cables and anchors to tether each turbine in place. Test projects for floating offshore wind in Scotland and elsewhere have been successful with further investment into the sector continuing to flow.
Constructing offshore wind farms involves numerous risk variables, and therefore potential causes of delay. Eliminating the risk of delay is impossible. But through a combination of understanding the site and environmental conditions, the development of knowledge of optimum construction methods from experience, and identifying, engaging with and managing risk issues as-and-when they arise, the impact of potentially delaying events can be substantially reduced.
1 This contractual clarity was lacking in an offshore wind farm case that made its way to the UK Supreme Court: MT Højgaard A/S v E.On Climate & Renewables UK Robin Rigg East Ltd [2017] UKSC 59.
2 North Midland Building Ltd v Cyden Homes Ltd [2018] EWCA Civ 1744.
3 See Braes of Doune Wind Farm (Scotland) Ltd v Alfred McAlpine Business Services Ltd [2008] EWHC 426 (TCC).
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